The digital transformation of financial markets has given rise to new forms of financing in which technology and law are becoming increasingly intertwined. Against this backdrop, Regulation (EU) 2020/1503 of 7 October 2020 on European crowdfunding service providers for business was adopted. Its main purpose is to establish a common framework for the provision of crowdfunding services within the European Union, facilitating cross-border financing while, at the same time, strengthening investor protection.
The Regulation is based on a simple idea: bringing together, through digital platforms, project owners seeking funding and investors wishing to provide capital. To this end, it regulates so-called crowdfunding service providers (CSPs), which are legal entities established in the Union and authorised to provide such services. Article 3 further requires these providers to act honestly, fairly and professionally, in the best interests of their clients.
The scope of the Regulation covers both loan-based financing and certain transactions involving transferable securities and instruments admitted for crowdfunding. However, its application is subject to a significant financial threshold: crowdfunding offers exceeding EUR 5 million, calculated over a period of twelve months in accordance with the rules laid down in the Regulation itself, fall outside its scope. This threshold is particularly important because it determines when a transaction may benefit from the specific European crowdfunding regime and when it must instead be assessed under other regulatory frameworks.
Alongside the regulation of CSPs, the Regulation introduces various mechanisms aimed at reducing risks for investors.
These include due diligence requirements concerning project owners, disclosure obligations and the key investors information document, which must present information in a clear, fair and non-misleading manner. For non-sophisticated investors, a four-calendar-day pre-contractual reflection period is also established, during which they may withdraw their investment offer without penalty.
However, when crowdfunding is linked to the use of distributed ledger technology (DLT) and blockchain (a type of DLT), a second regulatory dimension comes into play. Regulation 2020/1503 does not itself regulate the Entities Responsible for the Administration of the Registration and Record-Keeping (ERIR). This figure is governed by Spanish legislation, specifically Law 6/2023 on Securities Markets and Investment Services (LMVSI) (Ley 6/2023, de los Mercados de Valores y de los Servicios de Inversión), in Article 8.4. Among other matters, this Law regulates the representation of transferable securities through systems based on distributed ledger technology. Article 8.4 refers to the “entities responsible for the administration of the registration and record-keeping” of securities; ERIR is the abbreviation used in practice, for
example, in the issuance document of the case discussed below, although the LMVSI does not literally designate these entities by this name.
Law 6/2023 allows transferable securities to be represented through systems based on DLT. This means that technology is not used solely as an IT tool but may form part of the legal structure through which the security is represented. In such cases, Article 8.4 provides that the issuer must designate one or more entities responsible for the administration of the registration and record-keeping of the securities, which must in all cases be authorised to carry out the activity provided for in Article 126(a). Among other functions, these entities are responsible for managing the identification of holders and the various corporate actions, registrations and encumbrances affecting the issuance.
The importance of the ERIR becomes clearer when considering what happens from the investor’s perspective. Article 10 of the LMVSI provides that securities represented through DLT are constituted as such upon their first registration in the system, while Article 11 provides that their transfer is carried out by means of a transfer recorded in the distributed system itself. Furthermore, the registration produces effects vis-à-vis third parties from the moment the registration has been made in the relevant book-entry system or in the system based on distributed ledger technology, as applicable (Article 11.2). Article 13 completes this framework by providing that any person appearing as the legitimate holder in the DLT system is presumed to be the legitimate holder of the security and that, in order to transfer it or exercise the rights to which they are entitled, prior registration is required.
An example helps illustrate this process. A practical case involves an issuance of 58,176 bonds with a nominal value of EUR 100 each, for a total amount of EUR 5,817,600, represented through DLT and linked to a Smart Contract deployed on the Polygon blockchain. The amount of this issuance exceeds the EUR 5 million threshold established by Regulation 2020/1503 for crowdfunding offers over a twelve-month period and therefore falls outside its scope of application.According to its issuance document, the transaction is carried out pursuant to Law 6/2023. The issuance also involves an investment firm (ESI), which validates the project and the issuance document, and the ERIR, which maintains the securities register.
Ultimately, financing, securities and technology can be combined, but under different regulatory frameworks: the crowdfunding regulation governs a form of financing up to a certain amount; outside its scope, securities market legislation determines how the financial instrument may be represented, while DLT enables its digital registration. The ERIR acts as a fundamental legal component of this system, as it connects the technological infrastructure with the legal reality of ownership and transfers. Thus, blockchain does not replace law but rather becomes integrated into it as a new means of representing and registering transferable securities.
At Cysae, a law firm specialising in law and technology, we advise companies and startups on fintech, blockchain and financing projects. Our work covers areas such as corporate law, regulatory compliance and anti-money laundering. We closely monitor developments in crowdfunding regulation, an area where, as we have seen throughout this article, EU legislation, securities market regulation and distributed ledger technology converge.
